Anti-money laundering expert Ron Pol labels government's reasons for excluding trusts from its beneficial ownership regime 'remarkable for having been expressed out loud'

By Gareth Vaughan

An anti-money laundering expert is slamming the Government's plans to set up a beneficial ownership regime for New Zealand companies and limited partnerships as yet more tick box regulation and almost completely useless.

Ron Pol, a legal management consultant and principal at AMLassurance.com who recently completed a PhD on the policy effectiveness of anti-money laundering (AML) laws, says it appears the Government's focus is again on tick box regulations, appearance over substance, and a "steadfast continuity of an aversion to critical thinking, evidence, and the principles of policy effectiveness."

The Ministry of Business, Innovation & Employment (MBIE) last week issued a consultation paper proposing to increase the transparency of the beneficial ownership of NZ companies and limited partnerships. Information about company and limited partnership beneficial owners is currently not collected by MBIE's Companies Office. However, Companies Registrar Ross van der Schyff can request it for law enforcement purposes.

Releasing the paper last week Commerce and Consumer Affairs Minister Kris Faafoi said corporate governance needs to be strengthened to stop "erosion" of NZ as a good place for honest business. However, the Government plans to exclude trusts from the beneficial ownership requirements.

"The proposals look nice and tidy because they focus on easy areas like companies, and because they neatly match up with AML rules, and with how it’s been done elsewhere, notably the UK," says Pol.

"Yet some of the rationale used to justify the proposals are so ludicrous as to be seemingly satirical. Except they’re not. Unfortunately, the fact that they assert such things seriously converts satire into tragedy."

"So, asserting that the UK system is new and hasn’t been evaluated is technically correct, yet plain wrong. The UK system was, from the outset, inherently so flawed as mostly unfit for purpose. At least, assuming that the purpose was to prevent criminal misuse of corporate vehicles, although that is rather a heroic assumption in the face of the scale and scope of apparent lack of capacity to close obvious gaps as to raise questions about willingness and capacity," Pol adds.

(There's detail of the UK problems herehere and here). 

"Here, officials appear unimaginative, presumably without thinking much about the empirical evidence, [of] how criminals have misused New Zealand corporate vehicles, or how criminals might do so, appear largely to have copied many of the same features in relation to companies register changes that will render New Zealand’s system as meaningless as the UK’s for preventing criminal misuse," says Pol.

Pol's particularly scathing of the plan to exclude trusts from beneficial ownership requirements.

In the consultation paper MBIE says; "Trusts would be captured by the options in this paper where the beneficial owners of corporate entities are people who control a trust. However, we have not considered a beneficial ownership register for trusts in this paper. Privacy and confidentiality have historically been recognised as among the essential virtues of trusts, and a register would be a significant departure from that. Further, a register would come with significant compliance costs to private individuals and businesses, and administrative costs to government. A register has the potential to be a significant change and require considerable analysis. As part of its review of the law of trusts, the Law Commission concluded that a system of registration for trusts should not be introduced for these reasons."

These reasons for excluding trusts from beneficial ownership transparency are "remarkable for having been expressed out loud," says Pol.

"Homer Simpson’s response comes most immediately to mind. 'Doh'."

"A preliminary assessment suggests that the proposed changes might be summarised in three words. Almost completely useless," Pol says.

"It may be a new government, but it seems that much the same level of critical thinking appears to have been applied as with the last government’s much touted ‘solution’, requiring [NZ or Australian] resident directors. The result seems likely much the same now as then. A clear and obvious policy effectiveness failure."

Submissions on the consultation paper close on Friday, August 3.

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14 Comments

Absolutely. Without this, beneficial ownership requirements are a waste of time. The phrase incorporating “tits on a bull” comes to mind. The regime is a costly impost as it stands already, but carving out the most significant sector, and the one with proven links to money laundering activities just proves that our regulators are more about telling a good story rather than making a difference.

Why bother regulating and implementing any sort of decent system. It’s like the Wild West. The facades look good, but behind there is nothing.

Just another tick box exercise.

Back when the Panama papers leak was making rounds in local news, I was out with a few accountant mates of mine and we predicted this trust carve out from any resultant regulation over beer and nachos that evening.
A significant source of revenue for our government and several rich-listers comes from economic activities such as trust management services provided by advisory practices based in NZ.
The government obviously has no inclination to disrupt this billion dollar network that provides jobs to hundreds of highly-paid lawyers, accountants, bankers etc.

I think it's consistent we get from Wellington civil servants. Across all sectors. On roads we are seeing a plethora of signs around black spots instead of rebuilding those bits for actual safety. In agriculture we had a compliance system for tracking stock. It was often ignored, but the civil servants remained happy.
They can have some meetings, consultations, and write some policies. That's enough, who cares if it works.

Now why would they want to exclude trusts (the excuse for privacy and confidentiality is complete rubbish and they know it), yes they could still have family members as beneficial owners but it would be as much a concern as company beneficial owners (and they are not claiming the company beneficial owners need privacy protection). Perhaps trusts matter more so as retirement & benefit considerations come into play, particularly those who benefit massively by using trusts as a store of assets to hide ownership (especially when companies fold).

Interesting to hear today that Sir Peter Gluckman raised with officials the flawed science driving meth testing, long before his report. Yet no-one was interested at the time. Officials pushed 'standards' instead, actively disregarding evidence and many calls by scientists for evidence-based policies.

Likewise, the regulations requiring resident directors a few years back. Clearly absent the most basic critical thinking, self-evidently flawed and disregarding publicly available and well-documented evidence available and presented at the time. The AML extension likewise, which actively eschewed actual evidence at every stage, right through to Select Committee. Water quality. Irrigation. Climate change. Pike River. Many more. And the $11b 'hole' was a doozy, evidence-based be dashed. (Although I recall Bill English at least had the decency to look like he'd swallowed a rat when asked to back that one up). By their last term (in some respects like the last term of the last Labour govt) the previous National government was at least consistent. It was clear to many that science and policy effectiveness was seldom invited to the table.

This government appears less consistent. They have advanced evidence-informed policymaking that has reasonable prospects of actually improving social and economic outcomes, thus taking on Sir Peter's report in good faith, exploring evidence-informed solutions in Justice, Health, Pike River, etc. Yet in justice and health there have been difficulties articulating and communicating what often has a strong scientific basis and clear, well-documented paths to better outcomes. Connecting with the science would help.

But in at least 4 policy areas thus far there's a strong impression suggesting a rump of influential officials still hold sway, actively driving what has been described by academics as policy-based evidence-making. If so, it would be unfortunate, because most officials in my experience actually want to implement regulations likely to produce effective outcomes intended by government.

Time will tell

You want to make transactions less visible, bang a trust in the middle.
Lawyers as trustees.
Been happening since adam was a cowboy.

My empirical research showed that too. Crims setting up trusts and companies with lawyers/accountants, changing the names of trusts when they started making money from crime (eg from named family trust to nondescript name), using accountants to set up burner companies as consignees for methamphetamine shipments, lawyers and accountants acting as trustees for trusts purchasing real estate with proceeds of crime, even using trusts, accountants and lawyers to launder criminal proceeds through litigation

As regards the UK legislation, it may not actually be aimed at what you think. The US and the UK think strategically. Much of the money laundering network in offshore US and British locations was set up to foster money laundering by sympathetic regimes in the Cold War. The US and UK financial sectors are very much tax havens for foreigners, witness the ability of Russian billionaires to live in London year round but retain their non resident tax status.

I appreciate that these networks form a framework for criminal activity, but I'm not entirely convinced that the use of finance for security objectives is necessarily a bad thing. I don't see this essential part of the pussle being discussed. The US is pretty clear that its financial hegemony is central to its security. It therefore makes sense to them to preserve the functionality of the network and merely curb some of the more flagrant abuses.

It is important to largely ignore the wonderful words and statements and look at the thought process of the participants. If you don't know where they get their ideas from, then you risk being manipulated to their ends.

Thanks Roger. Very interesting. As a scientist I can't say one way or the other, because I have no evidence, but it is certainly difficult indeed to pin down any underlying 'real' reason for rules that in many cases could be much more effective, at least if the intent is policy effectiveness and the policy objective is to have a material, substantial, demonstrable impact on profit motivated crime.

(It will help a bit at the edges of course, and a few more crims will be caught. And some more millions into the POC fund. And of course if police get rolling - which has for some years now seemed a possibility, and now even likely - it will make the policy/regulatory side 'look' effective despite its obvious flaws. But if so it will have nothing to do with the new regulations; police have had pretty much all the powers they've needed since about 2003).

In NZ there's an obvious hypothesis as to 'the real' driver for the recent extension to lawyers etc, but difficult to prove because no politician would admit that we really just want to get the FATF tick before 2020. The crime prevention hypothesis is the one I have to work with in the absence of any other, but glaring holes abound as to make other hypotheses at least plausible contenders.

To use your example, the UK, the 25% beneficial o/ship threshold (if I recall reduced a bit since) would clearly be ineffective from the outset yet no expense was spared pushing it through. Any 10 year old could have said that 20% ownership would get around it. And without much thought might add, but maybe crims don't always hide their ownership, some things they might be happy to have their name to [which incidentally manifests in the NZ evidence base]. But maybe it would need a savvy 12 year old to ask, well, actually, I'd just get my mate to put his name to it. Like the days of Al Capone savvy crooks didn't have their name on anything, so whether it's 25% or all owners listed, dumb rules catch dumb crooks.

If your hypothesis is right, we may only ever know if there's a leak.

Thanks for the reply Ron. I loved your previous article about the % of criminal activity these things actually stop. I'm not sure we have very good systems for prevention of crime as the system has evolved to try to catch people after the fact, which is a very different thing. Often our attempts at prevention are major facilitators of crime, for example Prohibition, the War on Drugs, or even the farcical business of official olive oil labelling from southern Italy or the horsemeat saga from Romania.

Thanks Roger. You might like what I think will be coming out tomorrow then. I'll put a full article with lots of links on LinkedIn.

On prevention, I agree. The police 'prevention first' approach is actually quite inspirational, I reckon, and as far as I can tell genuine, with lots of good stuff flowing from it. Not as effective as it could be, but they've had massive transformational change, they are a perennial political kick-ball, and there's still lots of old-school thinkers in amongst the inspirational leaders at many levels including the top, so I still hold hope they'll meet the prevention intent in an even more meaningful way. There have certainly been many more positive signs in that shop, albeit some mixed, than in other agencies who really could help take crime prevention to a world-leading level. So it seems more likely its something others will do and NZ might follow. A shame b/c the core is already here, but I guess we can't be too hard on the coppers doing what they can with the deadweight of others on their shoulders too.

As usual we have a complicated process that makes life difficult for the the ordinary person yet doesn't hold anyone to account or change any outcomes. Many sectors in NZ run like this. It's the same with our construction and retail. Sure there are heaps of boxes to tick but ultimately the cowboys hide behind unaccountable entities and any punishments are far too weak to change behaviour . Just take a look at Youi insurance, how are those guys still operating?

It is odd isn't it? NZ was a world leader in outcomes in government some time ago, with some of the leading papers working with the OECD, truly developing better pathways to policy effectiveness. It formed some of the building blocks of my thesis. There are still some great pockets in various agencies, and the occasional flash of brilliance from a few Ministers, so there's no reason NZ couldn't regain its policy effectiveness mojo. But perhaps it will be for the social historians one day to explore reasons for a drift towards becoming a tick-box manufacturing country.

Policy makers lack of willingness to make trusts/companies, more transparent and accountable...not surprising, it must be the money.. (HT 50cent) .. Mind you in saying that, some of the banks and conveyancing lawyers may have felt someone looking over their shoulder the last few months, maaybe things will get better... just kidding... accountants, lawyers, banks and a few large companies pretty much make the rules here, and lets face it.. who can say no to fresh crayfish served with a mornay sauce.